Saturday, October 24, 2020

OPINION AND ANALYSIS | 21-07-2018 10:03

Uncertainty and risk in Macri's Argentina

Uncertainty about the value of the dollar in an economy that remains logically dollarised meant a flight from peso-denominated assets.

The best way to describe the current state of affairs in Argentina is that we are living in uncertain times. Uncertainty, as opposed to situations of risk, requires quick reaction and an adaptability to constantly changing conditions, which is what President Mauricio Macri and his closest advisor, Cabinet Chief Marcos Peña, have lacked over the past several months. Thus, what began as a currency crisis, due to a lack of credibility in the Central Bank’s capacity to contain a run on the peso, became a full-blown political crisis, with Macri’s 2019 re-election being called into question, as the opposition calls for Peña’s head on a stick as a sacrifice that would signify a change in strategy.

The president expressed full support of Peña but forced Central Bank president Federico Sturzenegger to resign, and has — at least temporarily — opened up the decision-making table to the so-called political members of the ruling Cambiemos (Let’s Change) Coalition. A confused Macri has admitted mistakes, but also made it clear that he plans to double down on his current economic strategy: cutting the deficit. As Macri stumbles forth, a fragmented Peronist opposition senses opportunity and, accustomed to the uncertainty of governing a volatile nation for decades, is trying to seize the initiative and plot its return to power. At stake is the future of an embattled nation, its citizens now collectively worse off after a violent devaluation and the unexpected resurgence of inflation and recession.

“There are known knowns, there are things we know that we know. There are known unknowns, that is to say, there are things that we now know we don’t know. But there are also unknown unknowns, there are things we do not know we don’t know.” That was Donald Rumsfeld, US secretary of state during the presidency of George W. Bush, during a 2002 press conference responding to a question about the evidence linking Saddam Hussein and terrorists’ possession of weapons of mass destruction. Initially ridiculed, Rumsfeld’s statement was brilliant in that it brought to light a complex dichotomy: calculated risk vs. uncertainty.

In Protean Power: Exploring the Uncertain and Unexpected in World Politics, international relations scholars Peter Katzenstein and Lucia Seybert argue that traditional conceptions of power fail to explain so-called ‘black swans’ or extraordinarily unexpected situations such as the 2008 global financial crisis or the rise of ISIS. The mainstream analytical framework — control power — sees power as “actors’ evolving ability to exercise control in situations of calculable risk and their consequent ability to cause outcomes these actors deem desirable.” Protean power, rather, “is the effect of actors’ agility as they adapt in situations of uncertainty.” While they define risk as something that is conmensurable, uncertainty refers to complex and dynamic situations in which projections and models breakdown. Control power is Newtonian while protean power pertains to a quantum world. They are not interchangeable, though, but interrelated in that situations are fluid.

During the first two years of the Macri presidency, the government, economic actors, and international investors analyzed Argentina and the global environment as one of calculated risk. Macri’s surprise electoral victory ended more than a decade of Kirchnerite populism, leading to a lifting of currency controls and a marked attempt at global integration. An expected recession was followed by falling inflation and economic growth. Investors profited handsomely as appetite for sovereign bonds and equities surged. Macri and his triumvirate — Buenos Aires Province Governor María Eugenia Vidal, BA City Mayor Horacio Rodríguez Larreta, and Peña — delivered a decisive victory over Cristina Fernández de Kirchner in 2017s midterm elections, confirming the fragmentation of the Peronist opposition. The question wasn’t whether Macri could win re-election in 2019, but whether Vidal, Rodríguez Larreta, or Peña would take over in 2023.

First came the self-inflicted wounds, with Peña’s public humiliation of Sturzenegger in late December jumpstarting inflation expectations and dilapidating the Central Bank’s credibility as an independent actor. Along the way came a new round of rate hikes by the Federal Reserve, causing a run on emerging market currencies, and the confirmation that the worse drought in three decades meant a horrible harvest for Argentina’s cash crop, soybeans. Macri and his Cabinet chief were facing a situation that had become uncertain, but they didn’t seem to initially notice; in Katzenstein and Seybert’s model, they went from affirmation of their strategy to improvisation. Finally, Macri, Sturzenegger, Economy Minister Nicolás Dujovne, and then-finance minister Luis “Toto” Caputo gave up, calling the International Monetary Fund to request an emergency loan.

Extreme volatility has created a tense situation for Argentina. Uncertainty about the value of the dollar in an economy that remains logically dollarised meant a flight from peso-denominated assets. The highest interest rates in the world generated a breakdown of the payments chain, as holding off on payments to invest in Lebacs (short-term paper paying more than 40 percent) gave a temporary sense of safety. The devaluation was quickly passed onto prices, meaning higher inflation immediately, while economic output ground to a stop and entered a recessionary cycle that could last well into 2019. Not being able to project the situation at the end of the year, or the end of the month, destroys businesses productive capacities, as activity falls, and both unemployment and bankruptcies grow.

From a political standpoint, an emboldened opposition will put obstacles in the path of Macri’s reform agenda, particularly in Congress where Cambiemos is the first minority in both chambers. The streets of Buenos Aires are once again cluttered with protesters as left-leaning organisations and union movements protest austerity. Across the nation, many of those that voted for Macri are disillusioned. They would never vote for Cristina, though. Yet, so-called moderate Peronists have a chance, but not a single one of them could beat Cristina in a primary or in the actual vote, the necessary condition for a chance at the Casa Rosada in a run-off.

Macri and his devalued team need to tame the peso and limit the impact of the current bout of stagflation both to reduce the damage on the people and on their electoral aspirations. Austerity, the IMF’s preferred antidote for bankrupt emerging nations, is a dangerous alternative. Whatever plan they come up with, Cambiemos needs these levels of uncertainty to subside. In this context, protean power plays against them.

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Agustino Fontevecchia

Agustino Fontevecchia


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